Recession Very Possible in Q1 of 2013: Investors And CEOs Are Getting Very Nervous With Cloud Of Uncertainty, The Announcements of Layoffs Are Coming Fast and Furious, And We All Start Feeling The Economy Is Decelerating!

Unless Congress acts before January, the fiscal cliff will eliminate almost 6 million jobs and send the unemployment rate to near 12 percent, the study warns. About $100 billion in spending cuts and about $400 billion in tax increases will go into effect in January unless Congress acts.

Anticipating the fall-out, companies are laying off workers, not filling jobs and delaying investments. Fear of the fiscal cliff has wiped out nearly 1 million jobs this year alone, the NAM study, called “Fiscal Shock: America’s Economic Crisis,” claims.

In the third quarter of 2011 the US Congress agreed to rather severe tax increases and spending cuts that would kick in as of January 2013, as a way to get a deal done to increase the debt ceiling. In addition, the Social Security payroll tax cut and extended unemployment benefits are also scheduled to go away in January. All told, if nothing changes, this abrupt shift in fiscal policy would result in a hit to the economy of about $650 billion, or a little more than 4% of GDP, at a time when the economy is likely growing less than 2% a year.

Let me break down the major components of the Fiscal Cliff:

Abolition of the Bush tax cuts, which amount to $265 billion, of which $55 billion is for the “wealthy” and $210 billion for the “middle class” (everyone else). Almost no one on either side of the aisle wants to actually go forward with axing the tax cuts for the middle class. Republicans want to hold on to the top-level tax cuts, and to my mind that’s a bargaining chip (see below).

The Budget Control Act, or the debt-ceiling deal, comes in at roughly $160 billion, with $110 billion of that in sequestration, mostly for defense; and there seems to be a growing consensus that not all of these cuts should be made.

The 2009 stimulus will also roll off (this is the 2% Social Security break and extended unemployment benefits). This amounts to $140 billion all on its own, or almost 1% of GDP. Almost everyone agrees that these tax cuts were supposed to be temporary.

The “ObamaCare” $24-billion tax increase on high-income households is almost sure to be allowed to go through.

Technically, there is $105 billion in the temporary “doc fix” and Alternative Minimum Tax, which every year are supposed to expire and every year are postponed, which of course allows Congress and the president (whoever is in control) to project lower deficits in the future, even though those cuts never happen.

If you add the $105 billion of fixes in #5 and the middle class tax cuts, you get $315 billion, or almost half of the Fiscal Cliff, which reduces the impact to 2% of GDP. Take some of the sting out of defense and you get to less than 0.5%.

“CEOs today are pensive about what to do next. They’re just sitting back, they’re not hiring as much, they’re probably not spending as much and so there’s a deceleration in the economy and we all start feeling it,” Fink told the network.

“In addition, we expected to have a little more resolution in Europe. We’re waiting for Spain to ask for help and accept conditionality and that’s been probably delayed by a couple weeks. So, you’ll have a little more uncertainty than we would have liked to have seen in Europe.”

Even if policymakers in the United States and Europe do avert disaster, market downturns are possible in the meantime.

“I think there are reasons totake some profits in the short term, and we have to look now and see how these things are going to be resolved,” Fink said.

Listening to the incessant chatter of confirmation bias from CNBC, you could be forgiven for thinking that earnings are ‘not that bad’. Headline-makers like AMZN, GOOG, and AAPL scare for a few moments but we are reassured back to numb BTFD-land by some disingenuous analyst (or worse a PM) who says he is buying with both hands and feet. The misleadingly top-down positive impression of looking at a ‘beats-to-total ratio’, suffers from one rather annoying bias (that often gets forgotten): analysts constantly revising their expectations throughout the reporting period, and hence rarely deviates from the current level of 71%. But, as Citi notes, if one examines results relative to analyst expectations prior to the reporting season, it’s clear just how disappointing Q3 has been – especially given the sell-side mark-downs already factored-in.

If one uses unrevised expectations – which simply anchor lower and make every succeeding number look relatively better and better as earnings season progresses in one direction or another – then the S&P 500’s earning surprises are even worse than Q2 – making the sixth quarter in a row of ‘missed’ pre-expectations…

government consumption exploded from a -.14 contraction to a .71 contribution

net exports (exports less imports) declined from a .23 contribution to a -.18detraction.

It is net exports that are most concerning. Since 1980 the global community has become very small due to advances in technology and communications. Globalization has made the U.S. very sensitive to changes in global economy due to the increasing demand for the products and services that we sell abroad. As we said previously:“Exports have made up roughly 40% of corporate profits since the end of the last recession. The recent announcements by CAT, FDX, NSC, UPS and others, all discussed the rising weakness with international trading partners – primarily in the Eurozone and China. Not surprisingly we saw a decrease of $0.3 Billion in exports in 2Q GDP. This was a 110% decrease from the previous estimate of a $3.1 billion increase. This decrease in exports is very important as it relates to current forward earnings estimates and the belief that the U.S. can remain decoupled from the rest of the world.“

Please keep in mind that these job cuts do not show up in the unemployment numbers yet. When big corporations announce the elimination of jobs, it often takes a while before those job losses actually take place.

Sadly, I believe that this is just the tip of the iceberg. I am convinced that the layoffs and the job losses are going to get a lot worse.